NEW STAR OF THE EAST

After seven years of construction, Azerbaijan's largest foreign investment, the huge Star Oil Refinery finally opened its doors on October 19, 2018 in Izmir, Turkey. Constructed by State Oil Company of Azerbaijan (SOCAR), the plant is the largest refinery in Europe, North Africa, and the Middle East and confirms the strength of both political and economic ties between the two brotherly states. With each new project, the long-standing economic union between Azerbaijan and Turkey is gradually transforming both countries into a powerful regional force capable of withstanding any global trade wars and crises.

Another symbol of friendship

It is symbolic that the launch of Star Refinery took place in this particular moment of time. Turkish economy is going through a serious financial crisis, which started in January 2018, when the value of the national currency lira depreciated by 40%. Inflation rate has hit its maximum over the fifteen years. According to the latest statistical data of the Turkish Institute of Statistics, the annual inflation rate in September was 24.5%. Despite reiterated assurances of the Turkish authorities that the national economy is recovering from stress, the negative impact of the crisis is obvious, urging the introduction of effective counteraction mechanisms. Therefore, the start of such a colossal project as SOCAR's Star Refinery is the most significant contribution to increasing investor confidence in Turkey. The Turkish government also has officially declared the refinery as the first special industrial zone in Turkey.

The foundation of Star Refinery was laid on October 25, 2011. The general contractor for the construction was an alliance of companies Tecnicas Reunidas SA, Saipem SpA, GS Engineering & Construction Corp and Itochu. Annual refining capacity of the plant is 10 million tons of different grades of oil such as Azeri Light, Kerkuk and Urals. The plant will annually produce 4.8 million tons of diesel fuel with a very low sulphur content, 1.6 million tons of naphtha, 1.6 million tons of jet fuel, 700 thousand tons of petroleum coke, 420 thousand tons of mixed xylene, 480 thousand tons of reformate, and 160 thousand tons of sulphur.

The presidents of Azerbaijan and Turkey, Ilham Aliyev and Recep Tayyip Erdogan attended the opening ceremony of the plant. Both leaders called the Star Refinery a new symbol of successful cooperation, friendship and unity. For Turkey, which is a net importer of oil and oil products, the launch of its own refining plant will, to some extent, reduce its dependence on imports and boost the national economy by brining additional currency into the country.

Speaking about the economic significance of the project, Mr. Erdogan noted that the Star Refinery would allow Turkey to save $1.5 billion annually on imports of oil products and reduce dependence on foreign oil supplies. The company will employ 1,100 people, which along with guaranteed benefits to the economies of Turkey and Azerbaijan "will also increase the welfare of the people of the Aegean region."

“This refinery is one of the most important and specific examples of our long-term efforts to strengthen cooperation in the energy sector. Each of our projects reinforces the potential of our countries making us a powerful regional force,” President Erdogan said.

According to President Ilham Aliyev, Azerbaijan invested $6.3 billion in the construction of oil refineries in Turkey, and another $700 million will be invested in the next stage. In general, the volume of Azerbaijani investments in the Aliaga Peninsula where Star Refinery and SOCAR-controlled petrochemical refinery Petkim are located, amounted to about $10 billion

By the way, Star Refinery is not the only example of successful cooperation between Azerbaijan and Turkey. It was preceded by other projects such as the Baku-Tbilisi-Ceyhan, Baku-Tbilisi-Erzurum, TANAP pipelines, the Baku-Tbilisi-Kars railway.

“Each of them is a gigantic project that is of great importance not only for our countries and peoples, but also for the region, the world, and Eurasia. Turkey and Azerbaijan jointly, demonstrating a strong political will, re-draw the energy and transport map of Eurasia. We did it all together. I am confident that Turkey and Azerbaijan will continue to go only along the path of success,” President Aliyev said.

The amount of investment - $ 19.5 billion.

According to forecasts by SOCAR Türkiye Enerji (SOCAR’s Turkish division), the annual turnover of Star Refinery will be $6-8 billion depending on oil prices. The plant will work at full capacity in January 2019. The payback period of funds invested in this project will be 9-10 years.

One of the suppliers of raw materials at the refinery will be the Russian company Rosneft. The agreement on oil supplies was signed on September 1, 2018 between SOCAR and Rosneft during the official visit of President Ilham Aliyev to Russia. Within one year, the company pledged to deliver 1 million tons of oil to the plant, starting in December 2018.

SOCAR expects that the operation of Star Refinery will provide Petkim petrochemical complex with raw materials (ligroin) allowing it to save on import costs associated with these products, and will annually bring $500 million in revenue to SOCAR.

Successful operation of Star Refinery is closely linked to the plans of SOCAR to expand its business in Turkey, which implies the entry of the company into the Turkish retail market of petroleum products.

“We plan to acquire a fuel distribution company in Turkey. In 2019, Star Refinery will start to operate at full capacity. Therefore, I think that in 2020 we will focus closely on this issue. We will solve it. There are fuel distribution companies on sale, but for us, companies with a network of 150-200 filling stations are considered small, we plan to acquire a larger one,” Zaur Gahramanov, President of SOCAR Türkiye Enerji said.

By the way, SOCAR has already attempted to acquire its own network of petrol stations in Turkey back in 2016. In particular, SOCAR claimed for the purchase of OMV Petrol Ofisi A.S., a fuel sales company owned by Austrian OMV AG. However, in the end, the buyer was Vitol Investment Partnership Ltd, the amount of the transaction with which amounted to 1.338 billion Euros.

Today, SOCAR owns a controlling (51%) stake in Petkim Petrokimya Holding, has constructed Star Refinery, a container terminal for Petlim ($400 million; total capacity 1.5 million containers per year), and a wind power plant (total capacity: 51 MW; costs: 55 million Euro). The company also supplies natural gas to the domestic market.

 “SOCAR’s total investments in the Turkish economy are planned in the amount of $19.5 billion, of which $14.2 billion have already been invested. With the completion of projects implemented in Turkey, the total SOCAR investment in Turkey will reach $16.5 billion. In 2018-2020, it is planned to invest another $3 billion in new projects,” the head of SOCAR Türkiye Enerji said.

New projects

After Star Refinery comes the construction of the second petrochemical complex, the second Petkim, on the Aliaga Peninsula.

In March-April 2019, the company expects to make a final investment decision on the implementation of this project. The construction of the complex is scheduled to begin in the middle of the same year and be completed by the end of 2022. The launch of the new complex is planned for 2023.

“Turkey is a very good market for petrochemical industry, and we are working on new investment projects. The state gives us strong support. The main problem of the Turkish economy is the current account deficit. SOCAR's projects, including Star and TANAP refineries, as well as the planned new petrochemical complex, will help reduce this deficit,” the head of SOCAR Türkiye Enerji believes.

The capacity of the plant will be 1 million tons of PTA (terephthalic acid) and polypropylene. Pre-implementation of the project is estimated at $1.6-2.2 billion. In terms of funding, SOCAR Türkiye Enerji’s internal resources can be used from the income of the Petkim complex, as well as external funds.

Frond-end engineering works for the project have already completed. In the next few months, the selection of contractors through a tender will begin. Negotiations were also held with BP and Axens on the acquisition of licenses, while the necessary ones have already been obtained.

According to the State Oil Company of Azerbaijan, currently Petkim Petrokimya Holding covers only 20% of Turkey’s domestic demand for petrochemical products. The construction of the new complex will increase this figure to 40-45%.

In parallel with the plans for the construction of the complex, SOCAR announced its intention to acquire gas distribution assets of EWE A.G. in Turkey. According to world media reports, EWE A.G. decided to sell 80% of its shares in gas distribution networks Bursagaz AS and Kayserigaz AS. The value of these assets is estimated at $200-250 million. SOCAR is one of the potential bidders of these assets along with its main competitor, Kolin Co.

“The company's investment chain in Turkey is represented by petrochemical, oil refining and natural gas sectors. To complete this chain, we have submitted our offers on the purchase of Turkish gas distribution assets of the German EWE A.G. and we believe that this transaction will be successful,” Z. Gahramanov said.

According to Gahramanov, the annual gas distribution capacity of EWE A.G. in Turkey is 1 billion cubic meters. SOCAR Türkiye Enerji expects to increase this figure in case of a deal.

All projects implemented by SOCAR in Turkey impress with their scale and volume of investments and labour. Surely, the most important thing is the outcome, which is obvious – the export of hydrocarbons from Azerbaijan to Turkey, as well as the transit of cargo and electric power. All this implies that the future projects of SOCAR will receive a “green light”, since the establishment of oil plants means not only high economic dividends but also the opening of new jobs and readiness to solve serious social problems.